The National Pulse

Why New York’s Proposal to Abolish Tipping Is a Terrible Idea

Recently, I had the pleasure of visiting Europe for the first time. It was a fantastic trip, and there were many things I loved about the continent, including its architecture, churches, mountains, food, and wine. My Instagram was totally lit.

But amidst all these items that make Europe such an awesome place to visit, there was one thing that was most definitely not so great: the service in restaurants.

As you may know, Europeans do not tip the way that we do in the United States. While a customer may round up a check to the next dollar, tipping pretty much doesn’t exist. Restaurant workers rely on their hourly wages to make a living. As one might expect, without the added incentive for waiters to provide diligent, conscientious service, a customer’s table does not get the same attention that it would in the United States. Lengthy wait times to place an order or have a drink refilled were the norm, not the exception.

All of this brings me to why New York Governor Andrew Cuomo’s proposal to abolish the “tip credit” in favor of a higher minimum wage is a particularly terrible idea — both for restaurant workers and customers.

The tip credit is a system that allows restaurants to pay tipped employees less than the minimum wage, knowing that tips will make up the difference.

However, if an employee’s combined hourly wages and tips do not equal the minimum wage, the restaurant must pay the difference to ensure nobody is compensated below it. This is a good deal for restaurant owners because it allows them to reduce labor costs, hire more staff (which means more attentive service), and keep menu prices lower for their customers.

As these lower operating costs are passed on to customers, families are able to dine more frequently (more patrons means more tips), and the lower cost of the meal allows customers to be more generous when tipping. The U.S. Census Bureau’s economist has found that “tips per hour appear to decrease in response to higher tipped minimum wages.” New York restaurant workers know that Governor Cuomo’s plan will reduce the amount that they earn from tips, and have demonstrated against his proposal here, here, and here (to name a few examples).

Michael Saltsman of the Employment Policies Institute also detailed the negative consequences of eliminating the tip credit in the New York Post:

According to a 2017 Harvard Business School study, each $1 increase in the tipped base wage increased the rate of restaurant closure for a median-rated restaurant by 14 percent.

[…]

After New York raised its tipped minimum wage by 50 percent at the end of 2015, over 270 restaurants closed statewide. (Neighboring Pennsylvania and New Jersey both gained restaurants over the same time period.) Labor Department data show that vibrant restaurant growth in New York City, which had been averaging roughly 6 percent annually, dropped to 1 percent.

Another increase of as much as 50 percent wouldn’t just force restaurants to shut down — it could spur those that remain to embrace payment alternatives opposed by servers. This includes the no-tipping model (“gratuity included”), where menu prices are significantly higher, but customers aren’t expected to tip. (One in seven surveyed restaurants in New York are very likely to take this approach.)

This would generate money to help restaurateurs pay the cost of the new mandate, but that’s money that tipped employees would have once enjoyed as income. Not surprisingly, servers in New York City — who earn $25 an hour on average, according to the New York City Hospitality Alliance — aren’t keen to give up their tips for a lower base wage. [Emphasis added]

The tip credit benefits restaurants, workers, and customers. To quote Michael Scott from “The Office,” this arrangement is “Win-Win-Win.” The tip credit leads to higher take home pay for workers, and it incentivizes workers to give customers the best service possible. Your dining experience is better this way.

But don’t take my word for it. Go to Europe, and see for yourself.

Photo credit: Tim Dorr via Flickr, CC BY-SA 2.0

Jonathan Decker

Jonathan Decker is the Chief Economic Correspondent for TheNationalPulse.com.

  • I have been to Europe. The tip is usually included in the price of the meal and it says so on the menu in most cases. (e.g., Service compris) This does not prohibit customers from adding more if they want to but it’s generally 1 to 2%. I have had good service in restaurants in Europe unless things have changed drastically since the last time I was there.